Tax cuts: The only thing government can't afford
By W. James Antle III
web posted January 27, 2003
With an anticipated federal budget in excess of $2 trillion for this
year, one wonders if some belt-tightening might be in order.
After all, the United States is still militarily engaged in Afghanistan
and it seems probable that it will become so in Iraq. Wars cost
money and larger wars cost a lot of money, but the governing
class assures us that we can afford it.
Apparently, we can afford a lot of things. Last year, the
president and Congress created a new Department of Homeland
Security, consisting of 22 federal agencies with 170,000
employees. As late as 1996, Republican congressional leaders
and presidential aspirants were pledging to eliminate Cabinet-
level departments, including at least the Department of Education
and Department of Energy. Now there are fifteen Cabinet-level
departments, with Homeland Security supposed to offer us
something that the Departments of Defense and Justice couldn't.
Given the terrorist threat and international crises occurring in
places ranging from the Middle East to North Korea, one would
expect that there would be more spending on national defense.
Yet under President Bush's own budget proposal for fiscal 2003
– as opposed to what the actual federal budget will be after
whatever concessions the Democrats, particularly in the Senate,
are able to win – allocates only about 18 percent of the federal
budget to defense spending. This is an increase compared to
recent years, when this percentage has been as low as 15
percent, but it is still less than the 26 percent of federal spending
military expenditures represented in fiscal 1983 and 48 percent
(!) in fiscal 1963. By comparison, mandatory entitlement
spending will account for close to 60 percent.
Looking at these figures and considering that we are projected to
run a deficit this year, one might wonder if there is anything that
could be done to move us closer to a balanced budget. There
doesn't seem to be much evidence that anyone is working
particularly hard to excise pork barrel spending. Just last year,
Congress – with the White House's acquiescence - decided to
ramp up farm subsidies, education expenditures and
transportation spending. A prescription drug benefit for
Medicare recipients? Still on the table. It will be shocking if at
least one Democratic presidential contender among the members
of Congress doesn't try to put national health insurance back into
play. It's awfully hard to cut federal spending if the federal
government keeps on assuming new responsibilities.
So where do those who style themselves as champions of fiscal
discipline draw the line? Why, at President Bush's stimulus plan
of course. It is weighted too heavily in favor of tax cuts for the
liking of avowed deficit hawks who have nevertheless never met
a federal program they didn't like. Worse, most of these tax cuts
would go to actual taxpayers rather than be credited to people
with no tax liability at all.
Eliminate punitive taxation of dividends? Lower marginal income
tax rates across the board? These are the things that the federal
government cannot afford. It is true that there are some people
and organizations genuinely concerned about the budget deficit
who are as critical of unwise spending practices as tax cuts; the
Concord Coalition is probably the best example. But most of the
caterwauling about how irresponsible tax cuts are is coming from
people who continually support expansions in federal spending.
For example, the liberal Center for Budget and Policy Priorities
is claiming that these tax cuts will "cost" $2.2 trillion over ten
years.
There is nothing new here. Bill Clinton took office in 1993 after
campaigning in part on a middle-class tax cut and eventually
shelved the idea because the government could not afford it.
Soon afterward, he and his wife Hillary (now the junior senator
of New York and a charter member of the "we can't afford tax
cuts" brigade) led the charge for national health care. After the
voters accordingly threw out the Democratic congressional
majority, Clinton steadfastly resisted most Republican tax-cut
proposals as unaffordable through the 1996 presidential election.
During that campaign, lower marginal rates were decried as a
"risky tax scheme" that would "blow a hole in the deficit." Four
years later, with the government now running surpluses even after
Clinton agreed to some Republican-sponsored tax cuts, including
a capital gains tax cut, Al Gore opposed marginal rate cuts. He
warned that such as "risky tax scheme" would "blow a hole in the
surplus."
In other words, there is no conceivable fiscal scenario under
which significant tax cuts to people likely to take risks and
engage in other productive economic behaviors Democrats deem
responsible or affordable. The point of tax cuts isn't to spur
consumer spending – consumer demand is virtually endless, and
consumers will always spend as much as they are able. Nor do
tax cuts merely "put money in people's pockets," as even tax-
cutters tend to assert. Lower tax rates enable people to keep
more of what they earn. More importantly (from an economic
perspective, that is - allowing people to retain the fruits of their
labor is an important thing morally), lower tax rates enable
people to keep more of what they will earn in the future. This is
as especially true at the margins, where economic decisions are
actually made.
The benefit of lower tax rates is that they encourage people to
do things that will cause them to earn and report more income.
This may include working more, creating or expanding a
business, investing more or otherwise contributing to economic
growth. Lower tax rates on capital encourage capital formation,
which in turn helps boost productivity, incomes and living
standards. Lower tax rates on income generally encourage
people to take place in income-generating activities, which helps
create new jobs and make the consumer demand we hear so
much about sustainable.
Those who oppose deficits only when they are believed to have
resulted from tax cuts are not being fiscally responsible. To fatten
government, they are starving the goose that lays the golden egg
of economic growth.
W. James Antle III is a senior editor for Enter Stage Right.
Enter Stage Right -- http://www.enterstageright.com